TIGTA Evaluates EO Examination Case Consolidation Efforts

Published date01 March 2021
DOIhttp://doi.org/10.1002/npc.30835
Date01 March 2021
Bruce R. Hopkins’ NONPROFIT COUNSEL
March 2021 5
THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
required regulatory election. That is, there is no due date
for these entities prescribed by regulation or IRS guidance.
Thus, unless these organizations apply within 27 months
of formation, they are to be recognized as exempt only as
of the postmark date of the application. Although these
organizations may qualify for exemption prior to the
application date, the IRS does not, Chief Counsel pointed
out, recognize exemption for these prior periods.
Annual Filing Requirements
This memorandum notes the two policies underlying
the 27-month rule relief. One policy is promotion of
efficient tax administration by providing limited time
periods for taxpayers to choose among alternative tax
treatments and encouraging prompt tax reporting. The
second is the policy of permitting taxpayers that are
in reasonable compliance with the tax laws to mini-
mize their tax liability by collecting from them only the
amount of tax they would have paid if they had been
fully informed and well-advised.
Also, an applicant must be eligible to make the election
to qualify for the relief. In this context, that means that an
organization must otherwise qualify for exemption for
all periods prior to the application to secure relief from
the 27-month rule. That requirement cannot be satisfied
here, Chief Counsel advised, because organizations that
have not filed returns for three consecutive years would
be simultaneously and automatically revoked if the relief
was granted and the organization recognized as exempt
retroactive to the date of formation.
Other Reasons for Denial of Relief
Further, the memorandum states that the IRS should
deny relief where the organization cannot show that it
(1) acted reasonably and in good faith and (2) the grant
of relief would not prejudice the interests of the govern-
ment. Chief Counsel wrote that the IRS is justified in the
view that an organization’s failure to file returns since
formation largely prevents the IRS from discovering its
failure to apply for recognition (as IRC § 508 requires) and
therefore the organization has not met the first standard.
As to the second standard, the government’s interest
is ordinarily prejudiced if the statute of limitations for
a period prior to the application has expired. Thus, the
Division was advised that relief should “ordinarily” be
denied to organizations that have filed returns more
than three years prior to the entity’s receipts of a deter-
mination letter granting relief.
Declaratory Judgment Actions
Denial of this relief by the Division does not sepa-
rately provide a right to petition a court for a declaratory
judgment (IRC § 7428) because, Chief Counsel stated,
this relief is purely a function of legislative grace, is not
the requisite justiciable controversy, and is reviewed
under a separate standard. Chief Counsel expressed the
belief that a court would not have jurisdiction to review
relief decisions absent some other controversy giving rise
to judicial jurisdiction.
Chief Counsel observed that it “appears to be” an
issue of first impression whether a court would deny a
motion to dismiss on grounds that it lacks jurisdiction in
a declaratory judgment proceeding if an organization
files a petition regarding denial of relief for a late-filed
application for recognition of exemption. [26.1(b)(ii)]
TIGTA EVALUATES EO
EXAMINATION CASE
CONSOLIDATION EFFORTS
As discussed in the December 2020 issue, the 2021
Annual Audit Plan of the Office of the Treasury Inspector
General for Tax Administration includes a determination
of the effectiveness of the TE/GE Division’s implemen-
tation of the Compliance Planning and Classification
unit, designed to consolidate examination identification,
planning, assignment, and monitoring. TIGTA’s report on
the point was issued on December 23.
Report Summary
The upshot of TIGTA’s findings is “mixed results.” The
CP&C function has reduced the number of unnecessary
contacts with compliant taxpayers and identified more
productive examinations. This reorganization reduced
the potential for bias in case selection, decreased the
processing time for EO function referrals (by 37 percent),
and began implementing a tracking system for assigned
inventory.
TIGTA reported, however, that because Division
management did not develop performance metrics to
measure progress towards achievement of reorgan-
ization goals, its leadership cannot determine if the
CP&C function improved the effectiveness and efficiency
of identifying, planning, classifying, and monitoring
the examination workload. Moreover, it is said that
Division management did not establish reorganization
goals and outcomes, have a dedicated implementation
team in place for the duration of the reorganization,
involve all key stakeholders, effectively communicate
with affected employees, or provide adequate project
management oversight to ensure timely implementation
of all necessary actions. This, TIGTA concluded, resulted
in “employee confusion” and “compromised the initial
success of the reorganization.”
Background
The Division, of course, serves tax-exempt organi-
zations, pension funds and retirement plans, state and
local governments, exempt bond transactions, and
Indian tribal governments and associations. In recent

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